An increase in a corporation's target rate would result in a(n)
A)increase in residual income.
B)decrease in return on investment.
C)decrease in residual income.
D)decrease in both residual income and return on investment.

Question

Quizplus · Accepted Answer

An increase in a corporation's target rate, which is the minimum rate of return required from an investment, would lead to a decrease in residual income. Residual income is the amount of income generated by an investment that exceeds the minimum or expected rate of return. When the target rate increases, the expected rate of return also increases, which means that the potential for residual income decreases. The return on investment can remain the same, increase or decrease depending on whether the investment is still able to generate a return that exceeds the target rate. However, the question only asks for the effect on residual income, which would decrease.

An Increase in a Corporation's Target Rate Would Result in A(n)